Commercial Litigation and Arbitration

Judicial Review of Arbitration Awards — Absent Affirmative Consent, Classwide Arbitration Barred — Ripeness

From Stolt-Nielsen S. A. v. Animalfeeds Int’l Corp., 130 S. Ct. 1758 (2010):

[Grant of Certiorari Implicitly Rejects Unarticulated Challenge to Ripeness.] [Footnote 2] Invoking an argument not pressed in or considered by the courts below, the dissent concludes that the question presented is not ripe for our review. *** In so doing, the dissent offers no clear justification for now embracing an argument "we necessarily considered and rejected" in granting certiorari. United States v. Williams, 504 U.S. 36, 40 (1992). Ripeness reflects constitutional considerations that implicate "Article III limitations on judicial power," as well as "prudential reasons for refusing to exercise jurisdiction." Reno v. Catholic Social Services, Inc., 509 U.S. 43, 57, n. 18 (1993). In evaluating a claim to determine whether it is ripe for judicial review, we consider both "the fitness of the issues for judicial decision" and "the hardship of withholding court consideration." National Park Hospitality Assn. v. Department of Interior, 538 U.S. 803, 808 (2003). To the extent the dissent believes that the question on which we granted certiorari is constitutionally unripe for review, we disagree. The arbitration panel's award means that petitioners must now submit to class determination proceedings before arbitrators who, if petitioners are correct, have no authority to require class arbitration absent the parties' agreement to resolve their disputes on that basis. ***To the extent the dissent believes that the question is prudentially unripe, we reject that argument as waived, Sprietsma v. Mercury Marine, 537 U.S. 51, 56, n. 4 (2002), and we see no reason to disregard the waiver. We express no view as to whether, in a similar case, a federal court may consider a question of prudential ripeness on its own motion. See National Park Hospitality Assn., supra, at 808 ("[E]ven in a case raising only prudential concerns, the question of ripeness may be considered on a court's own motion"). ***

[Standard of Review of Arbitral Award.] It is not enough for petitioners to show that the panel committed an error — or even a serious error. See Eastern Associated Coal Corp. v. Mine Workers, 531 U.S. 57, 62 (2000); Paperworkers v. Misco, Inc., 484 U.S. 29, 38 (1987). "It is only when [an] arbitrator strays from interpretation and application of the agreement and effectively 'dispense[s] his own brand of industrial justice' that his decision may be unenforceable." Major League Baseball Players Assn. v. Garvey, 532 U.S. 504, 509 (2001).... In that situation, an arbitration decision may be vacated under § 10(a)(4) of the FAA on the ground that the arbitrator "exceeded [his] powers," for the task of an arbitrator is to interpret and enforce a contract, not to make public policy. In this case, we must conclude that what the arbitration panel did was simply to impose its own view of sound policy regarding class arbitration.

[Footnote 3] We do not decide whether "'manifest disregard'" survives our decision in Hall Street Associates, L. L. C. v. Mattel, Inc., 552 U.S. 576, 585 (2008), as an independent ground for review or as a judicial gloss on the enumerated grounds for vacatur set forth at 9 U.S.C. § 10. AnimalFeeds characterizes that standard as requiring a showing that the arbitrators "knew of the relevant [legal] principle, appreciated that this principle controlled the outcome of the disputed issue, and nonetheless willfully flouted the governing law by refusing to apply it." ... Assuming, arguendo, that such a standard applies, we find it satisfied for the reasons that follow. ***

[T]he panel appears to have rested its decision on AnimalFeeds' public policy argument. Because the parties agreed their agreement was "silent" in the sense that they had not reached any agreement on the issue of class arbitration, the arbitrators' proper task was to identify the rule of law that governs in that situation. Had they engaged in that undertaking, they presumably would have looked either to the FAA itself or to one of the two bodies of law that the parties claimed were governing, i.e., either federal maritime law or New York law. But the panel did not consider whether the FAA provides the rule of decision in such a situation; nor did the panel attempt to determine what rule would govern under either maritime or New York law in the case of a "silent" contract. Instead, the panel based its decision on post-Bazzle [ Green Tree Financial Corp. v. Bazzle, 539 U.S. 444 (2003)] arbitral decisions that "construed a wide variety of clauses in a wide variety of settings as allowing for class arbitration." ... The panel did not mention whether any of these decisions were based on a rule derived from the FAA or on maritime or New York law.

[Footnote 4] The panel's reliance on these arbitral awards confirms that the panel's decision was not based on a determination regarding the parties' intent. All of the arbitral awards were made under the AAA's Class Rules, which were adopted in 2003, and thus none was available when the parties here entered into the Vegoilvoy charter party during the class period ranging from 1998 to 2002. *** Moreover, in its award, the panel appeared to acknowledge that none of the cited arbitration awards involved a contract between sophisticated business entities. See App. to Pet. for Cert. 50a.

Rather than inquiring whether the FAA, maritime law, or New York law contains a "default rule" under which an arbitration clause is construed as allowing class arbitration in the absence of express consent, the panel proceeded as if it had the authority of a common-law court to develop what it viewed as the best rule to be applied in such a situation. Perceiving a post-Bazzle consensus among arbitrators that class arbitration is beneficial in "a wide variety of settings," the panel considered only whether there was any good reason not to follow that consensus in this case.*** The panel was not persuaded by "court cases denying consolidation of arbitrations," by undisputed evidence that the Vegoilvoy charter party [the decades-old form of contract that the parties executed] had "never been the basis of a class action," or by expert opinion that "sophisticated, multinational commercial parties of the type that are sought to be included in the class would never intend that the arbitration clauses would permit a class arbitration." *** Accordingly, finding no convincing ground for departing from the post-Bazzle arbitral consensus, the panel held that class arbitration was permitted in this case.... The conclusion is inescapable that the panel simply imposed its own conception of sound policy. ***

[Footnote 6] Petitioners produced expert evidence from experienced maritime arbitrators demonstrating that it is customary in the shipping business for parties to resolve their disputes through bilateral arbitration. ***Under both New York law and general maritime law, evidence of "custom and usage" is relevant to determining the parties' intent when an express agreement is ambiguous. See Excess Ins. Co. v. Factory Mut. Ins. Co., 3 N. Y. 3d 577, 590-591, 822 N.E.2d 768, 777 (2004) ("Our precedent establishes that where there is ambiguity in a reinsurance certificate, the surrounding circumstances, including industry custom and practice, should be taken into consideration"); Lopez v. Consolidated Edison Co. of N. Y., 40 N. Y. 2d 605, 609, 357 N.E.2d 951, 954-955 (1976) (where contract terms were ambiguous, parol evidence of custom and practice was properly admitted to show parties' intent); 407 East 61st Garage, Inc. v. Savoy Fifth Avenue Corp., 23 N. Y. 2d 275, 281, 244 N.E.2d 37, 41 (1968) (contract was "not so free from ambiguity to preclude extrinsic evidence" of industry "custom and usage" that would "establish the correct interpretation or understanding of the agreement as to its term"). ***

[Footnote 7] The dissent calls this conclusion [that the panel simply imposed its own conception of sound policy] "hardly fair," noting that the word "'policy' is not so much as mentioned in the arbitrators' award." Post, at 8. But just as merely saying something is so does not make it so, cf. United States v. Morrison, 529 U.S. 598, 614 (2000), the arbitrators need not have said they were relying on policy to make it so. ***

In sum, instead of identifying and applying a rule of decision derived from the FAA or either maritime or New York law, the arbitration panel imposed its own policy choice and thus exceeded its powers. ***

[The Limited Import of Bazzle.] When Bazzle reached this Court, no single rationale commanded a majority. The opinions of the Justices who joined the judgment -- that is, the plurality opinion and JUSTICE STEVENS' opinion -- collectively addressed three separate questions. The first was which decision maker (court or arbitrator) should decide whether the contracts in question were "silent" on the issue of class arbitration. The second was what standard the appropriate decision maker should apply in determining whether a contract allows class arbitration. (For example, does the FAA entirely preclude class arbitration? Does the FAA permit class arbitration only under limited circumstances, such as when the contract expressly so provides? Or is this question left entirely to state law?) The final question was whether, under whatever standard is appropriate, class arbitration had been properly ordered in the case at hand.

The plurality opinion decided only the first question, concluding that the arbitrator and not a court should decide whether the contracts were indeed "silent" on the issue of class arbitration. The plurality noted that, "[i]n certain limited circumstances," involving "gateway matters, such as whether the parties have a valid arbitration agreement at all or whether a concededly binding arbitration clause applies to a certain type of controversy," it is assumed "that the parties intended courts, not arbitrators," to make the decision. 539 U.S., at 452. But the plurality opined that the question whether a contract with an arbitration clause forbids class arbitration "does not fall into this narrow exception." Ibid. The plurality therefore concluded that the decision of the State Supreme Court should be vacated and that the case should be remanded for a decision by the arbitrator on the question whether the contracts were indeed "silent." The plurality did not decide either the second or the third question noted above.

JUSTICE STEVENS concurred in the judgment vacating and remanding because otherwise there would have been "no controlling judgment of the Court," but he did not endorse the plurality's rationale. Id., at 455 (opinion concurring in judgment and dissenting in part). He did not take a definitive position on the first question, stating only that "[a]rguably the interpretation of the parties' agreement should have been made in the first instance by the arbitrator." Ibid. (emphasis added). But because he did not believe that Green Tree had raised the question of the appropriate decision maker, he preferred not to reach that question and, instead, would have affirmed the decision of the State Supreme Court on the ground that "the decision to conduct a class-action arbitration was correct as a matter of law." Ibid. Accordingly, his analysis bypassed the first question noted above and rested instead on his resolution of the second and third questions. Thus, Bazzle did not yield a majority decision on any of the three questions. ***

Unfortunately, the opinions in Bazzle appear to have baffled the parties in this case at the time of the arbitration proceeding. For one thing, the parties appear to have believed that the judgment in Bazzle requires an arbitrator, not a court, to decide whether a contract permits class arbitration. See App. 89a (transcript of argument before arbitration panel) (counsel for Stolt-Nielsen states: "What [Bazzle] says is that the contract interpretation issue is left up to the arbitrator, that's the rule in [Bazzle]"). In fact, however, only the plurality decided that question. But we need not revisit that question here because the parties' supplemental agreement expressly assigned this issue to the arbitration panel, and no party argues that this assignment was impermissible.

Unfortunately, however, both the parties and the arbitration panel seem to have misunderstood Bazzle in another respect, namely, that it established the standard to be applied by a decision maker in determining whether a contract may permissibly be interpreted to allow class arbitration. The arbitration panel began its discussion by stating that the parties "differ regarding the rule of interpretation to be gleaned from [the Bazzle] decision." ***As we have explained, however, Bazzle did not establish the rule to be applied in deciding whether class arbitration is permitted. The decision in Bazzle left that question open, and we turn to it now. ***

[Relationship of Federal Arbitration Act and State Arbitration Law.] While the interpretation of an arbitration agreement is generally a matter of state law, see Arthur Andersen LLP v. Carlisle, 556 U.S. ___, ___ (2009) (slip op., at 6); Perry v. Thomas, 482 U.S. 483, 493, n. 9 (1987), the FAA imposes certain rules of fundamental importance, including the basic precept that arbitration "is a matter of consent, not coercion," Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479 (1989).***

Underscoring the consensual nature of private dispute resolution, we have held that parties are "'generally free to structure their arbitration agreements as they see fit.'" Mastrobuono, supra, at 57; see also AT&T Technologies, supra, at 648-649. For example, we have held that parties may agree to limit the issues they choose to arbitrate, *** and may agree on rules under which any arbitration will proceed***. They may choose who will resolve specific disputes. ***

We think it is also clear from our precedents and the contractual nature of arbitration that parties may specify with whom they choose to arbitrate their disputes. See EEOC v. Waffle House, Inc., 534 U.S. 279, 289 (2002) ("[N]othing in the [FAA] authorizes a court to compel arbitration of any issues, or by any parties, that are not already covered in the agreement" (emphasis added)); Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 20 (1983) ("[A]n arbitration agreement must be enforced notwithstanding the presence of other persons who are parties to the underlying dispute but not to the arbitration agreement"); Steelworkers, supra, at 581 (an arbitrator "has no general charter to administer justice for a community which transcends the parties" (internal quotation marks omitted))***. It falls to courts and arbitrators to give effect to these contractual limitations, and when doing so, courts and arbitrators must not lose sight of the purpose of the exercise: to give effect to the intent of the parties. ***

From these principles, it follows that a party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so. In this case, however, the arbitration panel imposed class arbitration even though the parties concurred that they had reached "no agreement" on that issue***. The critical point, in the view of the arbitration panel, was that petitioners did not "establish that the parties to the charter agreements intended to preclude class arbitration." *** Even though the parties are sophisticated business entities, even though there is no tradition of class arbitration under maritime law, and even though AnimalFeeds does not dispute that it is customary for the shipper to choose the charter party that is used for a particular shipment, the panel regarded the agreement's silence on the question of class arbitration as dispositive. The panel's conclusion is fundamentally at war with the foundational FAA principle that arbitration is a matter of consent.

In certain contexts, it is appropriate to presume that parties that enter into an arbitration agreement implicitly authorize the arbitrator to adopt such procedures as are necessary to give effect to the parties' agreement. Thus, we have said that "'"procedural" questions which grow out of the dispute and bear on its final disposition' are presumptively not for the judge, but for an arbitrator, to decide." Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002)***. This recognition is grounded in the background principle that "[w]hen the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court." Restatement (Second) of Contracts § 204 (1979). An implicit agreement to authorize class-action arbitration, however, is not a term that the arbitrator may infer solely from the fact of the parties' agreement to arbitrate. This is so because class-action arbitration changes the nature of arbitration to such a degree that it cannot be presumed the parties consented to it by simply agreeing to submit their disputes to an arbitrator. In bilateral arbitration, parties forgo the procedural rigor and appellate review of the courts in order to realize the benefits of private dispute resolution: lower costs, greater efficiency and speed, and the ability to choose expert adjudicators to resolve specialized disputes. ***

Consider just some of the fundamental changes brought about by the shift from bilateral arbitration to class-action arbitration. An arbitrator chosen according to an agreed-upon procedure *** no longer resolves a single dispute between the parties to a single agreement, but instead resolves many disputes between hundreds or perhaps even thousands of parties. *** Under the [AAA] Class Rules, "the presumption of privacy and confidentiality" that applies in many bilateral arbitrations "shall not apply in class arbitrations," *** (Class Rule 9(a)), thus potentially frustrating the parties' assumptions when they agreed to arbitrate. The arbitrator's award no longer purports to bind just the parties to a single arbitration agreement, but adjudicates the rights of absent parties as well. *** And the commercial stakes of class-action arbitration are comparable to those of class-action litigation, *** even though the scope of judicial review is much more limited, see Hall Street, 552 U.S., at 588. We think that the differences between bilateral and class-action arbitration are too great for arbitrators to presume, consistent with their limited powers under the FAA, that the parties' mere silence on the issue of class-action arbitration constitutes consent to resolve their disputes in class proceedings.

[Footnote 10] We have no occasion to decide what contractual basis may support a finding that the parties agreed to authorize class-action arbitration. Here, as noted, the parties stipulated that there was "no agreement" on the issue of class-action arbitration.

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